What Future Pfi Ppp

7/29/2019 What Future Pfi Ppp

1/38

Private Finance Initiative and

Public Private Partnerships:What future forpublic services?

Includes extracts fromPublic Services or Corporate Welfare:

Rethinking the Nation State in the Global EconomyDexter Whitfield

(Pluto Press, 2001)

Published by Centre for Public Servicesnow the

European Services Strategy Unit

Email: [email protected]: www.european-services-strategy.org.uk

June 2001

1


2/38

Contents

Section 1 IntroductionSection 2 The origins of PFI/PPPSection 3 The basics of PFI/PPPSection 4 The claimed rationale for PFI/PPP Section 5 What Labour did for PFI/PPPsSection 6 25 reasons to oppose PFI/PPP

1. Reconfiguring services - PFI/PPP affects all staff and services2. PFI/PPPs are often more expensive than publicly financed projects3. Escalating project costs4. Whose value for money?5. PFI projects commit future governments to a stream of payments6. Affordability gap - cuts in other services7. PFI is subsidised by government8. High transaction costs9. Public sector comparator flawed10. Privatising the development process: selling land and assets11. Transforming the funding of capital expenditure12. Changing nature of risk

13. Lack of democratic accountability14. Service failures15. Public sector lose control over assets and services16. Private sector dictating social and public needs17. Two tier workforce transforming the labour process18. Impact on in-house services19. Best Value20. Refinancing PFI/PPP projects21. New form of contractor organisation22. Loss of public interest23. Long procurement and negotiation process24. Shifting the balance between capital and the state

25. A new age of corruptionSection 7 Alternatives to PFI/PPPSection 8 Exporting PFI/PPPSection 9 Impact of the World Trade Organisations General

Agreement on Trade in Services (GATS)Section 10 Public goods, private deliverySection 11 Corporate welfare complex

2


3/38

Section 1 - Introduction

This briefing paper focuses on the political, economic and social case against the Private FinanceInitiative (PFI) and Public Private Partnerships (PPPs).

New schools and hospitals are badly needed after more than two decades of decline and under-investment. It is understandable that parents, teachers, patients, doctors and nurses see the attractionof a new building irrespective of how it is funded. But the issue is not solely about today or tomorrowor the impact of individual projects, but the longer-term consequences of the private ownership ofBritains infrastructure and public services.

The briefing paper draws heavily on Public Services or Corporate Welfare: Rethinking the Nation Statein the Global Economy (Pluto Press, London, 2001).

The difference between PFI and PPP

PFI and PPP projects are very similar. PFI is a particular method of financing private investment whichrequires the private sector design, build, finance and operate facilities. PPP is a generic term used todescribe partnerships which involve more flexible methods of financing and operating facilities and/orservices although the end result in terms of privatisation is usually the same.

Partnerships are not new. High rise flats mushroomed across Britain in the 1950s and 60s asconstruction companies made deals with local authorities, committed to getting rid of the slums, andencouraged by the Conservative government special housing subsidies for high rise prefabricatedhousing. In the modern version, contractors and financiers are guaranteed repayment of their costsand also get to own and manage facilities, generate income from third party use, a 25-35 year repairsand maintenance contract, and the ability to negotiate which other support services they would like toprovide.

Local government has a history of collaboration with other organisations and joint ventures with theprivate sector. However, even outsourcing contracts are now rebranded as partnerships.

There are, broadly speaking, three types of partnership. Firstly, those between public organisationsand agencies who work together on a project or tackle a common problem for which they have somelevel of responsibility. Secondly, between a public body and private firm or voluntary body to provide aspecific service. Thirdly, a consortium of public, private and/or voluntary organisations to carry outregeneration and development.

PFI/PPP and strategic partnerships

Strategic service provider partnerships are likely to be the next wave of privatisation. They usuallyencompass ICT and related services resulting in the outsourcing of large numbers of so-called back-office staff to a private contractor. They should not be confused with a Local Strategic Partnership(LSP) which is a city-wide or sub-regional body to promote and co-ordinate regeneration.

Firstly, it is wrong to distinguish PFI from other elements of commercial involvement in public services.Strategic partnerships are also financed from public sector revenue budgets although usually less than10% of the cost is related to capital investment.

Secondly, Service Delivery Partnerships frequently claim a distinction between back-office supportand frontline services which is bogus.

3


4/38

Thirdly, Service Delivery Partnerships are usually for a shorter period of 10-15 years rather than 25-35years. This work will only return in-house with difficulty as the authority may well have lost the capacityto bid and provide services when the contract is concluded.

Finally, land, assets and the longer-term ownership of Britains infrastructure is ultimately moreimportant than the immediate funding mechanisms. PFI/PPP are also driving privatisation of thedevelopment process, integrating business into partnerships to run public services.

The governments approach to privatisation

The Treasury paper on Public Private Partnerships: The Governments Approach (2000) contains asection on privatisation in Part 2 (page 25). It concludes that overall, privatisation had beneficialeffects, with productivity improved and the economy better able to respond to change, but the recordvaried significantly industry by industry.

At its best privatisation, when combined with competitive markets, led to the creation of world classcompanies, reduced costs and prices and improved services to the consumer.

The paper goes on to admit that the record in other services was more mixed, public assets were soldfor less than their full value, prices have been higher than they should have been and whilst services

have not achieved the required standard, many shareholders and managers have profited. Many ofthese deficiencies can be traced back to the way privatisation was implemented. In other words, thegovernment has no principled objection to marketisation and privatisation.

The link between PFI/PPP and the WTO General Agreement on Trade in Services (GATS)negotiations

The World Trade Organisation (WTO) is currently in the process negotiating an extension of the GATSagreement which will extend marketisation and privatisation of public services globally. The scale ofPFI/PPP and other marketisation and privatisation policies in Britain means that the government is, ineffect, implementing the GATS proposals in advance of a global agreement (see Section 9 for furtherdetails)

Vested interests

There is increasing evidence of a network of business and political interests, financing and promotingthe rapid expansion of PFI and PPPs. Section 11 identifies the companies which are financiallycommitted to PFI/PPP projects and investors in Partnerships UK PLC (previously the TreasuryTaskforce for PFI privatised in March 2001). Some of the same companies have financed the Institutefor Public Policy Research (IPPR) Commission on PPP and are corporate funders of the New LocalGovernment Network (NLGN), a lobby group of elected members, officers, academics and privatecontractors. Both organisations are right of centre advocates of PFI/PPP and privatisation, arefinanced by private contractors, and jointly published a report which supported the government'sposition that it was neutral on who delivered services.

Important industrial and community action

There have been a number of important campaigns against PFI/PPP projects. Examples are theDudley hospitals strike, similar action at University College Hospital, London and industrial action atBaglan hospital in Wales. The Haringey schools campaign failed to stop the PFI project, although thetrade union did get a 25 year TUPE agreement with Jarvis and created an organisational base whichplayed a key role preventing the outsourcing of LEA support services. The Pimlico school campaignstopped the rebuilding of a school and a luxury housing scheme. The school is being refurbishedinstead.

4


5/38

Section2 - The origins of PFI/PPP

Infrastructure investment in Britain declined dramatically after the 1973 oil crisis and InternationalMonetary Fund intervention three years later. Both Labour and Conservative governments imposedsubstantive cuts in public sector capital spending programmes. Net public sector investment under theLabour government, 28.8bn (5.8 per cent of GDP) in 1974/75, more than halved by the end of thedecade and plummeted to a mere 0.4 per cent of GDP in both 1988/89 and 1998/99. The decline inpublic sector investment in the last two decades occurred at the same time as the government hadunprecedented privatisation receipts and North Sea Oil revenues.

By the mid 1980s a spate of studies by the Confederation of British Industry, the Federation of CivilEngineering Contractors, and the now defunct National Economic Development Council, had exposedthe deteriorating state of the infrastructure and assessed the potential impact of further cuts in capitalspending. The major contractors and construction industry bodies demanded increased governmentcapital expenditure and relaxation of the External Financing Limits on nationalised industries andPSBR controls. There was little reference to the use of private finance.

The Conservative government doubled the road building programme to 12bn and proposed thatadditional road schemes could be built and operated by the private sector in corridors of opportunity.The Treasurys Ryrie rules, which required a matching reduction in public funding in response toprivate funding of infrastructure projects, were relaxed in 1989. Some British companies were involvedin some commercially unsuccessful private infrastructure projects overseas, but the Thatchergovernment insisted that privately financed schemes should not be subsidised. A number of privatesector transport schemes including the rail link to the Channel Tunnel, a second Severn Bridge, a raillink to Heathrow and the Docklands Light Railway extension were developed at this time.

By 1990, with much of the basic transport and utility infrastructure either in private ownership orplanned for privatisation, contractors were lukewarm over the prospect of private roads. They turnedto other sectors such as hospitals, prisons and urban development where they believed they couldobtain higher returns and access surplus land and property for development.

The Private Finance Initiative was launched in November 1992, a financial mechanism to obtainprivate finance which could satisfy the political need to increase investment in the infrastructurewithout affecting public borrowing, guarantee large contracts for construction companies and createnew investment opportunities for finance capital. Most politicians had a short-term perspective, butcapital was looking longer term. The crisis in the flow of PFI projects between 1995-97 was partlycaused by demands for state financial guarantees and partly because PFI consortia were flexing theirmuscles to ensure contracts reflected their interests. In one sense, PFI was a natural progressiongiven the Conservatives privatisation and economic policies in the 1980s. The privatisation machinewas never going to stop, at least not of its own accord. PFI is privatisation by stealth, privatising thoseparts which could not, at least politically, be sold-off as complete services. It is the route to the ultimatemarketisation and privatisation of health, education and social services.

Taxpayers no longer need to own hospital buildings claimed the Treasury (Private Finance Panel,1996 p7).

5


6/38

Section 3 - The basics of PFI/PPP

This section summarises the basic elements of PFI/PPP projects. Many of the issues are examined inmore detail later in the text.

There are various types of PFI/PPP but the most common in Britain requires the private sector to

Design, Build, Finance and Operate (DBFO) facilities, usually for 25 - 35 years (7-15 years forequipment). The private sector finances construction and is repaid by the state, in regular payments,for the use of the buildings and services provided under a facilities management contract. Paymentsare classified as revenue, not capital, and thus do not count against public borrowing and does notcommence until the building is completed. It therefore has enormous short-term political appeal.

Design, Build, Finance and Operate

The private sector will design, build, finance and operate facilities for the length of the contract afterwhich the building may be transferred to the public sector (but see below). There is increasingpressure for two other types of PFI/PPP schemes:1. Design, Build and Finance (DBF) schemes (which exclude operational services);2. Design, Build and Operate (DBO) schemes (which rely on public rather than private funding).

Hard and soft facilities management

Facilities management in PFI/PPP is usually divided into hard and soft services. The hard servicesare those such as repairs and maintenance which are directly connected to the asset, its availabilityand therefore to the payment mechanism. These services are always an integral part of the PFI/PPPproject and will be carried out by the private contractor. Soft services are support services such ascleaning, grounds maintenance, reception and catering which are not directly connected to theavailability of the asset. There is scope for these services to be retained by public sector in-houseservices. For example, the Stoke on Trent schools and Blackburn Hospital PFI projects both excludedcertain support staff on the grounds that they were good quality services, proved by benchmarking,and were likely to keep on improving. The private sector wants to widen the scope of services coveredby PFI/PPP contracts. Services should be excluded before the OJEC Notice is issued rather thanbeing part of a variant bid for which the private sector will submit proposals.

The exclusion of some services does not alter the long-term fundamental objections to PFI/PPP, nordoes it reduce the privatisation of Britain's infrastructure. The promotion of Design, Build, Finance(DBF) schemes is not a real alternative because the private sector will still operate building repair andmaintenance services although they would deliver fewer support services.

Risk transfer

Building and operating a public building entails a number of risks, such as the risk of construction costoverruns, higher than expected maintenance costs, changes in legislation affecting how the building isused, increases or decreases in demand for the services provided and so on. The public sector hastraditionally accommodated these risks. Under PFI/PPP risks have to be specified, quantified andapportioned to the client or contractor with the majority transferred to the private sector (see Section5).

Value for money

The Treasury insists that PFI/PPP must provide value for money, which means that the estimatedcost over the life of the contract (calculated at Net Present Value by assessing future costs at todaysprices) should be lower than the notional cost of traditional procurement using a Public SectorComparator.

6


7/38

Buying a service, not an asset

Private finance is presented as an alternative form of procurement by converting the payment of debtincurred in obtaining assets into revenue payments as a payment for services. Although thegovernment is keen to stress the buying a service approach, frequently only the capital value ofPFI/PPP projects is cited rather than the much larger combined capital and operating costs. Forexample, one London Borough of Haringey secondary schools project is a 87m capital project but the

total PFI payment is 233m over 25 years. Similarly, the South Buckinghamshire NHS Trusts 45mnew hospital will in fact require a total payment of 244.7m to United Healthcare over 30 years.

Whole life asset performance

PFI/PPP projects are supposedly costed and priced on the basis of the suitability and sustainability ofthe initial design and construction, the long-term maintenance, management and operation of thebuilding together with continuous improvement of services over the length of the contract.

Performance-related reward

The minimum payment to a PFI/PPP contractor must not exceed 80% of the total payment, in other

words, part of the unitary charge is a performance related payment, depending on the contractorachieving standards set out in the output specification and targets established for continuousimprovement.

Private finance, off balance sheet

When public bodies borrow to finance investment, the money borrowed is counted as adding to thepublic sector borrowing requirement and appears in the governments accounts and financial statistics.If the private sector borrows the same amount of money to finance the same investment it does notappear in the public accounts even though the public body enters a long-term contractual commitmentto repay the private sector from its revenue budget. This is called off-balance sheet financing. Off-balance sheet financing is justified if sufficient risk is transferred to the private sector.

Bankability

PFI/PPP must show evidence of bankability, which is PFI jargon for commercial interest, the certaintyof an income stream and a willingness to consider all opportunities for generation of revenues from thesale of assets or third party use of facilities and services.

Output specification

The specification states the required outputs and performance standards leaving the private sector todesign and operate services.

PFI/PPP projects are run by a consortia of companies which usually set up a special purposevehicle company to run the project

Consortia usually consist of a construction company, financial institutions such as banks, a facilitiesmanagement company (and subcontractors), architects (and a Registered Social Landlord in housingprojects).

7


8/38

Advisers and consultants

Each organisation involved in PFI projects - the public body, members of the PFI consortia, tenants oruser organisations - have their own legal, financial and other advisers which is an additional cost forPFI projects (see below).

Long-term contracts

Contracts are usually between 25 - 35 years for facilities or 7-12 years for IT, vehicles and equipment.

Consortia make proposals

The negotiated EU procurement process allows PFI consortia to make their own proposals for whatmay be included or excluded from the contract. In addition, authorities often change the scope of thecontract by adding or subtracting responsibilities, developing additional sites, or withdrawing thembecause of policy changes or the non-availability of land.

8


9/38

Section 4 - The claimed rationale for PFI/PPP

How the government justifies PFI/PPPs

The government admits that private sector borrowing is more costly but claims that PFI/PPPs morethan compensate by providing better value for money because:

* The private sector is more innovative in design, construction, maintenance and operationover the life of the contract.

* It creates greater efficiencies and synergies between design and operation. It is claimed thatPFI/PPPs result in better services, better value for money and efficiency savings.

* It invests in the quality of the asset to improve long-term maintenance and operating costs.

* The discipline of the market place ensure that the private sector manages risk better(Treasury, 2000).

It is also claimed that the government is using private capital as an addition to public investment toclose the all-too-clear gap that exists between the quality of our public sector buildings and facilitiesand those of the private sector (Milburn,1999). These claims are challenged below.

PFI/PPP projects do not bring any extra investment because irrespective of how hospitals, schoolsand other facilities are funded, they have to be paid for by taxpayers. It is a myth that PFI/PPP isadditional investment, for example, 85% of the funds for major NHS capital projects since 1997 havecome from the private sector via PFI/PPP schemes (but is ultimately paid by the public sector).The ideological support for PFI/PPP

Leaving aside the economic and political arguments, the promotion of PFI and PPP has gone beyondthe immediate its the

onlyshow in town and whilst tight Treasury control of public spending forces the

public sector into using private finance, a new ideology has emerged to justify this policy. PFI/PPP isnow claimed to be the bestshow in town!

It is important to understand the ideology underpinning PFI/PPP. There are six core elements.

1. Public services can and should be delivered by the private sector

The growth in marketisation and privatisation will enable private companies to increase their controland influence in policy development and the decision making process. They will also be in anincreasingly stronger position, both financially and politically, to launch their own privatised serviceswhich could cause a spiral of decline in public service provision as private services replace publicprovision for the middle classes and public provision is targeted at the less affluent working class andthe poor. An example of this is council housing. The best quality housing has been sold off through theright to buy, new council house building has stopped and public resources are channelled into housingassociations. Council housing now primarily caters for the young and elderly, hence Laboursprivatisation programme to terminate the tenure (see Section 10).2. Private management is always more efficient

There is little evidence to support this claim. There is good and bad management in both the publicand private sectors. The belief in the superiority of private sector management serves another purposefor the advocates of PFI/PPP, because it supports the case for competition, provides a basis for

9


10/38

criticising public sector performance and justifies central government intervention in the affairs of localgovernment. For example, the DfEE is forcing some local authorities to outsource LEA functions andbring in private sector management. The irony is that many of these managers once worked for localauthorities.

Labours Manifesto (2001) calls for a spirit of enterprise, but this is a commercial model in the contextof PFI/PPP. A spirit of enterprise is meaningless to public sector workers when the government willnot make a clear commitment to public service management. Neutrality and what works is what

matters are fundamentally incompatible with modernising from within (see chapter 9 for an outline of anew public service management).3. It makes sense to separate purchasers and providers

The government is wedded to the idea that it is beneficial to separate strategic policy making from theprovision or delivery of services. This is the old mantra of splitting public policy down the middle -separating purchaser-provider or client-contractor. For example, the NHS can remain comprehensiveand universal, free at the point of use, but health care can be delivered by a diversity of providers.

Advocates of this position also claim that the dividing line between public and private domains isarbitrary, and that the public sector working in isolation could not achieve the type of outcomes thatcitizens want (The Guardian, 21 March 2001). This position ignores the economic reality that the

more that the private sector does provide, the more it wants to provide. Increased control of publicprovision provides the economic power to expand private services, which then undermine the principalof a comprehensive and universal service. A diversity of providers will not necessarily lead toimproved public services.

The IPPR claim that the Blair government has failed to build a new account of the relationshipbetween social ends, public spending, public service and private enterprise (The Guardian, 21 March2001). The IPPR claims that public services need to buy-in from parents, patients, carers andneighbours if they are to deliver real social benefit (The Guardian, 21 March 2001). They also suggestthat users should have a stronger role in commissioning which could mean communities themselvesdelivering or co-owning public services. This is called reinventing the wheel.

4. Fair and open competition between rival providers

The advocates of PFI/PPP believe that competition is the most effective way of obtaining publicservices and they believe that competition between rival providers maximises innovation andefficiency. This view ignores the fact that competition is virtually always primarily on financial groundsresulting in cuts in services and jobs and it has high transaction costs consuming resources whichcould be used to improve services. It is a myth that the benefits of competition are always greater thanthe transaction costs (see The National Cost and Benefits of CCT, Centre for Public Services, 1995).

There is no evidence that competition automatically leads to innovation and efficiency. These willalways be secondary to the private sectors need to make a profit and to protect the interests ofshareholders. Furthermore, competition between public and private sectors is not on a level playing

field because of their different values and operating systems. The negotiated procurement process forPFI/PPP also means that private interests, protected by the cloak of commercial confidentiality, areprioritised over social need and public interest (see chapters 6 and 8, Public Services or CorporateWelfare).

Competition and marketisation also provide opportunities for business to advocate privatisation,promote policies, which reinforce vested interests, become more proactive in making project proposalsand become more powerful in the procurement process.

10


11/38

5. Focus on outputs, not inputs

The switch to focus on outputs and outcomes (not inputs), means that the risks of delivering outputsare transferred to the private sector, for example, the government no longer needs to build roadsbecause it can purchase miles of maintained highway (ibid). Outcomes, not ownership is the newmantra, thus freeing public services from the straight jacket of monopoly control (Milburn).

6. It does not matter who provides the service

This is at the root of Labours Third Way and is only sustainable if one believes that public servicescan and should be privately delivered, that private sector management is superior to that in the publicsector, that government should only purchase services, that a separation between strategic policy andprovision is beneficial, that competition is the best way of achieving efficiency, that the ways servicesare delivered is irrelevant and all that matters is the quality of the final product.

The right wing backlash claim

A further ideological dimension is the claim that Labour must wholeheartedly embrace PFI/PPP inorder to save the public sector.

The IPPR has claimed that it is essential to enforce diversity (privatisation) across the public sectorbecause in five years time, if state financed and delivered public services have not improved and arethen considered to be failing, there would be a right wing backlash, which could mean the end ofuniversal public services. They would be lost forever. The IPPR also argue that PPPs may form a newcoalition of support for adequate public spending between non-public providers and public sectorcommissioner (Guardian 21 March 2001). Surely this is little more than one political party using thepolicies of another to shield their own privatisation programme?

The saving the public sector' thesis is built on a number of assumptions:

- That public services can be partially privatise, that there is a halfway point in privatisation,and that this new mixed economy or diversity of providers is feasible and sustainable.

- That private sector management and provision of public services is claimed not to constituteprivatisation because assets will be returned to the public sector.

- That private finance, ownership and operation of the welfare state infrastructure will not leadto service and financial failures. There is no evidence that a mixture of public-private provisionwill produce any additional improvement in five years time.

- Finally, it ignores the currentbacklash against privatisation, for example, public support to re-nationalise Railtrack, and government acceptance that competition and private hospitalcleaning has led to dirty hospitals.

The proposition that partial privatisation is a feasible strategy to block full privatisation in five yearstime is untenable. It ignores the fact that business constantly wants a larger share of public servicemarkets and some form of halfway position will be used to drive ever-wider marketisation andprivatisation across the public sector.

New approach to privatisation

A new twist to PFI/PPP is being promoted by the IPPR and others such as the Office of HealthEconomics. They argue that that since many PFI projects offer only marginal value for money gainswithout innovation in design and service configuration, public funding should replace private capital.Projects should become Design, Build and Operate (DBO).

11


12/38

Taking the dogma out of PFI/PPP

The focus on the practical, efficiency and value for money of PFI/PPP projects is a trap. Theadvocates of PFI/PPP need to narrow the debate as much as possible to exclude discussion aboutprinciples, ideology and political beliefs. They want to confine the debate to the business of howservices are provided, in effect depoliticising public services. This side steps crucial issues about

democratic accountability, the limitations of government by contract, social need and service quality.

Equally significantly, they want to limit debate to the here and now to avoid disclosure about thelonger-term consequences of PFI/PPP. This would raise fundamental questions about what happensto public services when they are increasingly provided by transnational companies and the privatesector gains monopoly control. They will cease to be public services except in name only. We areencouraged to think that this is progress towards an enabling model of the state but the reality isstarkly different. Marketisation and privatisation could result in a corporate state model by 2020 (seechapter 7 of Public Services or Corporate Welfare).

Labour moves the goal posts

The case for PFI/PPP has shifted from a financial justification to one where the value for moneyargument is paramount, coupled with the belief that the private sector is superior to the public sector interms of management, expertise, efficiency and quality. Both the National Audit Office report (NAO,1999) and the Andersen report for the Treasury Taskforce (Arthur Andersen, 2000) stress theimportance of a claimed average 17% efficiency savings. Although the Treasury continues its fiscalstringency to ensure that PFI is the prime way to finance capital schemes, the government considersPFI/PPP projects are an essential part of the modernising public services agenda.

12


13/38

Section 5 - What Labour did for PFI/PPPs

Whilst Labour spending plans increased public sector capital expenditure from 3.3bn in 1998/99 to8.7bn in 2001/02 (at 1997/98 prices), this is still only one per cent of GDP and totally inadequate tomeet the huge infrastructure backlog (for example, NHS 2.6bn and council housing 10bn repairs).The extent of the privatisation of Britains infrastructure is highlighted in Table 1 showing that a large

part of the transport, energy and utilities and communications infrastructure is owned and operated bythe private sector and was largely privatised by 1997 when Labour came into power. This left thesocial and welfare state, defence and criminal justice system infrastructure in the public sector, whichhave subsequently become prime targets for privatisation. The Labour government has systematicallydriven PFI/PPP into the remaining parts of the public sector.

Table 1: Infrastructure privatisation in BritainPrivatisation Completed Privatisation Agenda 2000+Transport Energy and

UtilitiesCommunications Social

Infrastructure ofwelfare state

Defence andsecurity

Criminal Justicesystem

RailwaysAirportsPortsBus

servicesRapid

transitRoads

ElectricityOil and gasWater &

sewageWaste

managementCoal mining

British TelecomCable & WirelessTV transmitters

HospitalsSchoolsCouncil housingResidential HomesLibrariesGovt. officesSports & recreationIT systemsRegenerationEcon. Development

EquipmentIT systemsBarracksTrainingFire

PrisonsPolice stations &

HQMagistrates &

Crown CourtsIT & communication

systemsFleet managementDetention centres

The new Labour government acted quickly in 1997, setting up and implementing the Bates Review,which recommended streamlining the PFI/PPP process. They also rushed through legislation to clarifythe powers of NHS Trusts and local authorities to enter into PFI agreements and guarantee financialpayments over the life of the contract, irrespective of public expenditure. In other words, PFI contractpayments are ringfenced. They also established new processing and prioritising procedures for

PFI/PPP projects in all government departments together with project teams and removed therequirement that all public sector capital projects be tested for private finance potential. This ensuredthat only bankable projects were prioritised. PFI was heavily promoted in local government, whichhad lagged well behind other sectors. The Labour government appears to have a better understandingof the needs of business than the right wing ideologies of the previous administration!

Net public infrastructure investment is planned to increase to 19 billion per annum by 2003/04,representing 1.8 per cent of GDP. However, a further 21 billion of PFI deals are expected to besigned in the same period. By late 2000, nearly 350 PFI projects had been signed with a capital valueof 25 billion. A further 227 projects were at an advanced stage. The welfare state infrastructureaccounted for 19 per cent of the value of projects.

However, this is a misleading indicator of the scale of PFI projects because it excludes projects whichhave been centrally approved but not signed and those which have been advertised following a localdecision to proceed.

13


14/38

Table 2 Sector Analysis of PFI projects in BritainValue of

signedprojects (m)

Value of projectswith preferredpartner (m)

Value ofprojects withshortlist (m)

Total

Welfare StateTransport andenvironment

Criminal JusticeDefenceOther

4,654

11,628

1,4104,7472,653

1,466

757

481509741

925

647

1015,813

40

7,045

13,032

1,99211,0693,434

Total 25,092 3,954 7,526 36,572

Source: The PFI Report, October 2000

Extending PFI/PPP to community services

National levelMajor infrastructure projectsTransportCriminal justice system

City levelMedium sized infrastructure projectsHospitalsSchools

Community levelLocal servicesPrimary care surgeries and health centres

Regeneration projectsLocal services strategic service delivery partnershipsCouncil housing estates

14


15/38

Section 6 - 25 reasons to oppose PFI/PPP

This section provides evidence and detailed arguments which represent the case against PFI/PPPorganised under 25 headings.

1. Reconfiguring services - PFI/PPP affects all staff and services

The government emphasises that PFI/PPPs are contracts for services, not buildings, which makes thedistinction between support services (such as building maintenance, cleaning, catering, transport andother related services and core services such as teaching and medical treatment) divisive andunsustainable in the longer term. Capital expenditure forms on average just 22% of the total cost ofPFI projects (Andersen/LSE, 2000).

State withdrawal from ownership and management of the infrastructure has profound implications forcore services. PFI/PPP consortia will eventually include private companies bidding to manage schoolsand local education authorities or private healthcare companies.

PFI/PPPs create artificial divisions between core and support services, for example, dividing healthand education teams both between white collar and manual services and between core services andsupplementary activities.Partnership consortia have an economic interest in the performance of thecore service within their building. For example, a PFI/PPP consortia has a direct interest in a schoolseducational performance, in maintaining pupil numbers and ensuring its popularity is translated intomaximising income generation from community and business use of the facilities. Conflict and tensionwill exist between partnership and non-partnership schools over the quality of teachers, which schoolsare allocated resources for new or special projects and the distribution of any future budget cutsbetween schools and services. Consortia will, therefore, want to ensure that they have the bestteachers and minimum disruption to the running of the business.

Once the private sector controls the operational management of facilities they will be in a powerfulposition to influence service delivery policies. It makes a nonsense of the team approach, integratedservices and joined-up government to which almost everyone has been striving for years.

The current division between core and non-core services is unlikely to be sustainable. The concept ofthe public sector continuing to provide core staff and buying space in an increasing number ofprivately managed and operated is not credible. PFI/PPP consortia are also likely to want to expandthe range of services provided. They are likely to make LEAs and Governing Bodies offers regardingsupport services and additional teaching which will widen in scope (Whitfield, 1999). Facilitiesmanagement contracts are re-tendered every five to seven years to give consortia a degree offinancial flexibility, an opportunity to impose substantial changes in the labour process and provide aPFI/PPP valve to relieve financial pressure.

The case for PFI has, in part, been justified on a division between core (teaching, clinical services)and non-core services such as facilities management. This was always fraudulent because a divisioncannot be made in practice. The government is currently negotiating with private health companieswho want complete control of the 26 new NHS fast track diagnosis and surgery centres employingdoctors, nurses and all clinical and non-clinical services. This finally exposes the lie that PFI is limitedto the provision of buildings and related services. PFI is privatisation by stealth, privatising those partswhich could not, at least politically, be sold off as complete services. It is the route to the ultimatemarketisation and privatisation of health, education and social services.

Private sector takeover of failing services and/or authorities results in commercial values beingembedded in the public sector, leading to a spiral of decline and privatisation. A two tier public/privatesystem will develop with the public sector increasingly marginalised and residualised. Despite the

15


16/38

development of super-hospitals, twelve of the fourteen first wave PFI/PPP projects had an average 32per cent reduction in staffed acute beds in the 1996-97 period.Evidence of moves to include core services:

* The Welsh Assembly blocked a bid by the Conwy and Denbighshire Health Trust in March2001 to include 23 renal nurses and ward clerks in a PFI project for a new renal and diabeticunit at Glan Clwyd District General hospital. The full business case had been approved by theTrust and the North Wales Health Authority. Staff would have transferred to Fresenius Medical

Care had the move not been blocked.

* The government is holding discussions with the private sector over the possible privatemanagement and operation of the new NHS fast track centres.

* The Department of Health has established a joint venture company, NHS Local ImprovementFinance Trust (NHS LIFT) with Partnerships UK PLC (see Section 11) to finance primary carefacilities. The DoH will invest 175m in the company over the next four years with matchingequity from Partnerships UK. It will own and lease local health facilities, premises for GPs,dentists and chemists and will initially concentrate in inner city areas. It will extend the principleof PFI/PPP to community facilities. "NHS LIFT is a catalyst for change with the aim ofstimulating long term interest amongst a wide range of investors" (DoH website).

* The outsourcing of LEAs, City Academies and the takeover of failing schools by privatecontractors is likely to lead to private companies employing all school staff, including teachers.

2. PFI/PPPs are often more expensive than publicly financed projects.

The government can borrow at lower rates of interest than the private sector. A sample of PFIschemes (excluding NHS projects) concluded that the current weighted average cost of private sectorcapital on PFI projects is 1-3 percentage points higher than public sector borrowing (Andersen/LSE,2000).

* PFI increases the cost of hospital building. Total project costs (construction and financing

costs in a sample of hospital projects were between 18-60 per cent higher than theconstruction costs alone (for example, North Durham 60.6% higher, Norfolk 49.1%, Bromley35.8% and Greenwich 30.8%.

* PFI/PPP availability costs (in effect the repayment of financing and construction costs) werebetween 11.2 - 18.5 per cent of the construction costs in contrast to 3.0-3.5 per cent annualinterest on publicly financed projects.

The government claims that the private sector can compensate for the higher cost of borrowing bybeing more innovative in the design, construction, maintenance and operation over the life of acontract by avoiding costly over-specification in design; create greater efficiencies and synergiesbetween design and operation; invest in the quality of the asset to reduce maintenance costs; and to

manage risk better (Treasury, 2000).

3. Escalating project costs

Escalating costs are a common feature of PFI/PPPs, for example, Birmingham City Councils schoolsproject rose from 20m for eight schools to 65m (rising to 70m in 2000) for ten schools prior toselecting a preferred bidder (ADLO, 1999). The first 14 NHS projects had an average 69 per cent costincrease between the Outline Business Case and early 1999.

16


17/38

* The cost of the new Worcester Royal Infirmary increased 118%, rising from 49m in 1996 to108m in 1999 (Pollock et al, 2000). This was partly due to an increase in beds from 380 to452 but 29.9m were probably attributable to financing costs.

4. Whose value for money?

The Andersen/LSE study claimed that the average saving for PFI, measured against the public sectorcomparator, was 17% based on projects operational by late 1999. However, this was not a technical

sample because it was made up of PFI projects submitted by civil servants and excluded all NHS PFIprojects.

Other evidence suggests that the value for money claims are much smaller:

* The first PFI school project, Colfax School in Dorset, was only about 2% less than the publicsector comparator.

* The Dartford and Gravesham Hospital is expected to cost a mere 2.8% less than the publicsector comparator (NAO, 1999), the Carlisle hospital indicated a 1% saving (Gaffney et al,1999) and the North Durham hospital Full Business Case indicated a nil saving as the PFI andpublic sector comparator costs were the same (Gaffney and Pollock, 1999).

5. PFI projects commit future governments to a stream of payments

PFI contracts commit public bodies to revenue payments for 25-35 years.

By 1999, future commitments for PFI projects totalled 83.8bn up to 2026 (Budget Red Book, 1999).However, they only represent signed PFI/PPP deals and are only relevant if there is an immediatecessation of all prospective deals. Signed deals are a tiny fraction of projects under development and,assuming no policy changes and no change in the speed of approvals, a new stream of projects willdevelop annually between now and 2026. The financial commitment is more likely to be 415bn,arrived at by assuming that the rate of project approvals in the 1997-99 period continues until 2026.

The cumulative impact of PFI/PPP revenue payments will mean future governments may have to raisetaxes, impose charges for services which are currently free, reduce borrowing to finance remainingpublic services or cut spending in non-PFI/PPP services. The future cash outflows under PFI/PPPcontracts are analogous to future debt service requirements under the national debt, and, potentially,more onerous since they commit the public sector to procuring a specified service over a long periodof time when it may well have changed its views on how or whether to provide certain core services ofthe welfare state (Financial Times, 17 July 1997).

The true cost of individual PFI/PPPs will not be known for 25-35 years when the first contractsterminate. Then all social welfare costs and benefits can be fully assessed. Government and businessinterests appear very concerned about the intergenerational burden of social policy commitments yetsign up to PFI/PPP projects with little regard for the longer-term public cost of PFI/PPPs.

There is no indication that PFI/PPPs are a temporary fix, indeed, quite the opposite as they are nowembedded in third way ideology and government programmes. Those who use the logic of capitalismto claim that the state should not own facilities but simply finance and provide services are beingeconomical with their analysis. The concept of the private sector owning and managing theinfrastructure but stopping short of providing core services is untenable. PFI/PPPs are merely a halfway position between public ownership and the total privatisation of health, education and socialservices. The concept ofjoint venture is not applicable because there is no pooling of resources - thepublic body withdraws from property and facilities management merely paying usage and service feesas a lessee to repay the private sectors construction and operating costs.

17


18/38

This leaves a smaller proportion of budgets to deal with other non-PFI/PPP services thus limiting anauthoritys ability to respond to changing social needs and urgent priorities.

6. Affordability gap - cuts in other services

Increased revenue payments committed to PFI projects frequently mean cuts in other services

Dartford example where three hospitals were closed to provide for the PFI hospital and afterthe new hospital opened the NHS Trust plans to close a community hospital

Impact on corporate spending priorities The OBC for the Wakefield street lighting project showed a 729,000 increase in the annual

street lighting budget (18.2m over 25 years), a 35.3% increase on current expenditure.

7. PFI is subsidised by government

Local government PFI/PPPs receive revenue support subsidy in the same way as if they were publiclyfinanced projects - 800m per annum is allocated up to 2001/02. The NHS effectively subsidisesPFI/PPP schemes through three mechanisms - capital charges (paying the same for a reduced assetbase), the capital support scheme and diverting block capital funding to PFI/PPP schemes. Ten of thefirst wave NHS projects receive an annual subsidy of 7.3m because of affordability problems(Gaffney and Pollock, 1999). Accountants Chantrey Vellacott have estimated that the private sector's

higher cost of borrowing costs the public sector an extra 50m for every net 1bn of PFI contracts(Chantrey Vellacott, 1999). They also noted that an extra 10bn public sector three-year capitalspending 1999-2002 would still leave the public finances well within the Maastricht convergencecriteria.

The Scottish Executive is providing 13.8m per annum for the first seven years, increasing to 16.1mfor the remainder of the Glasgow schools 29-year PFI contract, representing a third of the unitarypayment for the use of the schools.

The Dorset Police Authority (Western Division) PFI project was approved by the Home Office in May1998 with a PFI credit of 12.4m. Five months later it had increased to 24.2m.

8. High transaction costs

Because each party has a battery of legal, financial, management and other advisers and consultants,fees are substantially greater than those incurred in market testing. Any disputes during a 25-yearcontract are likely to bring in another flurry of invoices from advisers.

* The advisers costs of the first fifteen NHS PFI hospitals were 45.2m, which consisted of20.4m fees for lawyers, 14.6m for financial advisers and 10.2m for managementconsultants and other advisers. Advisers fees represented between 2.4% and 8.7% of thecapital cost of the projects (Hansard, Written Answer, 28 February, 2000).

* The Home Office alone spent 5.3m on legal and accountancy fees between May 1997 and

March 2001 for PFI schemes in the Prison Service and various IT projects (Hansard, WrittenAnswer, 23 March 2001).

* The cost of public sector staff time in developing PFI projects and the cost of the procurementprocess is rarely taken into account. This means the actual transaction costs are substantiallyhigher.

9. Public sector comparator flawed

The purpose of the Public Sector Comparator (PSC) is to provide a benchmark to assess the potentialvalue for money offered by a PFI project. It is open to manipulation because PFI project teams want to

18


19/38

prove value for money and can do so by exaggerating innovation and benefits of a PFI option (andalso ignoring the problems experienced by current PFI schemes) whilst assuming limited scope forinnovation and efficiency improvements in the public sector. They also frequently underestimate thefull cost of the PFI option. Costings are included without evidence to support them. Not surprisingly,the PSC regularly shows PFI projects to provide value for money. The public sector comparator hasbeen described as an invention, artificial and biased (Sussex, 2001).

However, it should be emphasised that until the Treasury change the regulations to permit a full and

comprehensive social, economic and environmental audit of public and private options, the PSC willremain a partial and ineffective method of assessment.

The difference between the public sector and PFI costs may be marginal and could be reversed with asmall alteration to the financial estimates.

* The PSC often assumes a worst-case scenario for the public sector cost calculations, forexample, in estimating possible construction cost overruns and delays.

* The savings assumptions in the OBC spreadsheet may be inflated. For example, the OutlineBusiness Case for the Wakefield street lighting project included PFI savings in four parts ofthe costings - the capital costs at 15% (or 2.4m over 5 years), ongoing capital costs of 15%

(or 2.5m over 20 years), operating costs at 15% (or 3.8m over 25 years) and energy costs at7.5% (or 1.45m over 25 years). The total PFI savings built into the PFI model were 10.15m,yet the difference between the PFI and PSC costs on a net present value basis was only680,000. Minor adjustments to the costings would fail to prove value for money.

* The PSC may include cost estimates for risks, which are not actually transferred in a PFIcontract. For example, the PSC for the Cumberland Infirmary PFI project in Carlisle includednearly 5m to pay for the risk of clinical savings targets not being met and 2.5m included formedical litigation. Neither risks were transferred but the net present cost of the public sectoroption was inflated by 7.2m (The Only Game in Town, UNISON, 1999).

* The PSC may also inflate the cost of risks transferred to the private sector.

* Failure to show savings required under Best value in the public sector comparator.

* Inflating the financial benefits of risk transfer.

* Under-estimating the cost of PFI advisers whilst assuming services will be subjected tofrequent marketing testing in the PSC model at inflated costs.

* Under-estimating PFI monitoring costs and/or showing higher costs under the PSC model.

* Assuming ambitious supplementary income streams from advertising or third party use forPFI project, whilst not taking account of similar potential income under a public sector option.

10. Privatising the development process: selling land and assets

Gaining control of surplus land and buildings (such as school playing fields, vacant land, emptyhospital buildings and so on) for property development is a key part of PFI/PPP projects for the privatesector. They often provide an important source of finance and profit, and ensure that surplus publicassets are sold for private development.

Land and property deals are a fundamental part of PFI/PPP projects enabling consortia to developsurplus land and building for commercial and residential use, but it may take several years for thevalue of these assets to be realised. Ownership of key development sites adjacent to new highways,

19


20/38

airports and ports (particularly in developing countries) will increase the influence of transnationals ineconomic policy and direct foreign investment.

Some PFI/PPP hospital developments have changed from a mix of refurbishment and new build onexisting sites to large new complexes on out of town greenfield sites. Their physical form and financialcommitments can distort health care planning. Patients and staff are forced to bear the additionaltravel costs and government has to finance road improvement, traffic and transport changes.

PFI/PPPs are not simply the replacement of public by private finance, but they ensure the privatisationof the development process, operational management, the disposal of surplus land and property, andin some cases, additional development generated by the initial investment. In fact, business is avehicle for the longer-term privatisation of the core services of the welfare state. Supplying andmanaging the infrastructure on behalf of the state avoids having to create a private sector market inwhich individuals pay private insurance and fees. PFI/PPPs are a means of finance capital extractinghigher returns from public services than they normally would by providing private capital in place ofgovernment borrowing and contract capital ie transnational service companies and consultantssecuring long term contracts. They redefine public service because they can remain publicly financedbut privately delivered in privately-managed buildings.

11. Transforming the funding of capital expenditure

Local authority PFI schemes receive the same subsidy as public sector capital schemes via theRevenue Support Grant, controlled by central government PFI credits for approved projects. PFIcredits were increased from 250m in 1997/98 to 800m in 1999/00.

Since the 1990, health service reforms, capital spending has been financed internally by NHS trustshaving to make an annual surplus of income over expenditure equal to 6 per cent of the value of theirassets (buildings and equipment) and to make a charge for depreciation through capital charges.

Capital spending is heavily dependent on NHS trusts including capital charges in prices charged topurchasers, receipts from property and land sales, and NHS trust efficiency savings.

Before PFI/PPPs, public bodies planned and designed infrastructure projects, raised finance,supervised construction and then operated the facilities. The private sector were usually involved inthe design and construction phases. However, financial and construction markets require PFI/PPPs tocompete with other investment opportunities, and as the state becomes increasingly reliant (captive)on PFI/PPP projects, markets are likely to force up the cost of borrowing, construction and relatedcosts. Furthermore, market forces will extend throughout the entire infrastructure procurementprocess. At the next economic crisis, public sector capital spending will again be cut and reliance onPFI/PPPs will be further embedded.

12. Changing nature of risk

The public sector has always borne the risk of facilities requiring adaptation as service needs change,

of reletting or changing the use of buildings. There are many different types of risk such asconstruction risk (completing new buildings on time), design risk (the way buildings are used maychange), and technological risk (information and communications technology will effect how servicesare delivered and buildings used). The management of risk has become a profitable industry bypackaging or commodifying different types of risk and creating new insurance markets. Partnershipprojects require the transfer of risk from the public to the private sector (at a cost of course) althoughthe Hatfield rail crash highlighted the reality that the state always bears ultimate responsibility and thatrisk will never be fully transferred.

20


21/38

The accommodation or transfer of risk has become a central feature both for those who wish tomaintain collective risk through universal public provision, and for the marketisers, who want totransfer certain risk, at a suitable cost, from the public to the private sector.

The publicsector has always borne the risk that public investment in new schools and hospitals will beadequate for the required level of future demand. Training adequate numbers of teachers and medicalstaff is another risk undertaken by the state. There are different types of risk such as design andconstruction risk (overrunning construction costs, adequate space and facilities), operational risk

(escalating repair and maintenance costs), financial risk (failure to achieve rent, user fee or toll incometargets, fluctuations in foreign exchange and interests rates); technological risk (equipment becomesredundant faster than expected), and residual value risk (value of the building at the end of thecontract).

Risk transfer involves identifying the different types of risk, allocating legal responsibility and pricingeach element so that it can be recharged to the public sector. Risk is highest in the early years of ainfrastructure project but decreases over time so that the later years provide continuous cash flowswith declining risk. This is in sharp contrast to most industrial investment where product obsolescenceand competition from other firms increases as a product ages.

But, risk has been commodified (made into a commercial product) so that it can be identified, priced

and responsibility can be legally attributed. Long-term deals are currently being signed on a staticconcept of risk transfer. However, the nature of risk will change as the private sector gains increasingcontrol of the infrastructure, delivery of support services and will be able to strongly influence (if notcontrol) the supply chains of users, the growth of private services in public facilities and third partyuse of spare capacity. Risk is identified, quantified, attributed and priced. In other words it ismonetised.

13. Lack of democratic accountability

The accountability of partnerships is a major issue. Companies and private non-profit organisationsare generally accountable only to shareholders and directors respectively. Partnership often involves adilution and merging of public, private and voluntary interests. Whilst a public body will have to

maintain a commitment to matters of public interest, a partnership reflects negotiation andaccommodation of different and competing interests. Some partnerships focus on the private andvoluntary participants supporting the local authority or health authority to achieve its objectives.Partnership by desire is being replaced by partnership by necessity; an ideology of partnership whichseeks to direct important sectors of a capitalist economy collectively - in the public interest - butthrough privatised means (Sternberg, 1993, p239). The concept of partnership implies that the stateand capital are jointly concerned with the public interest and that either side can ensure that the otherdelivers its contribution.

Partnerships are sealed by contracts with companies, not committees. Most partnerships are cloakedin secrecy with limited democratic accountability. The state and private contractors collude to protectintellectual property rights using commercial confidentiality to minimise disclosure, participation,

assessment of deals and public accountability. In this context, partnership is little more thannegotiated privatisation.

At the same time as the state is shedding its responsibility to individuals (and to public sector workers)it is also intensifying its commitment to financial and service capital with long term multi-million poundPFI contracts.

Democratic accountability is weakened by:- The process of developing PFI projects, particularly in the procurement process.- The disclosure of information with use of commercial confidentiality used to limit the releaseof information and to constrain any representatives consulted.

21


22/38

- The accountability of advisers is limited.- Partnership boards usually have a few hand picked elected members and officers, togetherwith private sector representatives (and sometimes independent representatives) whichfrequently operate as a cabinet committee and bound by commercial confidentiality.- Negotiations between a preferred bidder and the authority are secretive behind closed doors- Reliance on a contract to implement responsibilities which are open to challenge and highlegal costs of disputes. The experience of compulsory competitive tendering in localgovernment, market testing in the civil service and the NHS and the large central government

ICT PFI contracts show that a contract is no guarantor of service delivery, let alone democraticaccountability.- Accountability of the project once it is operational is minimal

14. Service failures

The performance of the major computing PFI/PPPs has been less than successful. The catalogue offailures and cost overruns is summarised in Table 3. This provides evidence of project delays, costoverruns, service failures and a failure to transfer risk. In addition, 14 local authority housing benefitand revenue contracts outsourced to private contractors have caused havoc for service users, electedmembers and managers in 1999-2001. Five contracts have been terminated.

The Treasury has commissioned a report from the Office of Government Commerce to identify thesavings and efficiency of contracting out (outsourcing). But there is a large body of detailed evidenceof the impact of outsourcing and privatisation over the last 20 years.

See chapter 6 of Public Services or Corporate Welfare and the following:

1. The Gender Impact of CCT in Local Government, Equal Opportunities Commission, 1995.2. The National Costs and Savings of CCT, Centre for Public Services, 1995.3. Public Services Action No. 1 - 56, 1983-1996, Centre for Public Services.4. Reinventing Government in Britain, The Performance of Next Steps Agencies: Implications for theUSA, Centre for Public Services, 1997.

22


23/38

Table 3 Partnership and private finance failuresDepartment/contract Contractor Problems/costsNational Insurance

Inland Revenue

Passport Office

Immigration and Nationality

Northern Ireland Vehicle

Licensing Agency

Benefits Agency/Postpayment card

National Air Traffic ServicesNew Control Centre

Metropolitan Police

Dartford & Gravesham NHSTrust Hospital

Andersen Consulting(now Accenture)

EDA

Siemens

Siemens

EDS

ICL

Lockheed Martin

EDS

Pentland

Delays and renegotiation of the contract. 53m extracost to taxpayers Andersen paid 4.1m financialpenalties. 172,000 potential cases of underpaymentof pensions which required over 43m incompensation payments. The Pensions Minister,Jeff Rooker, described the National Insurance

computing system as rubbish. Inland Revenueannounced in late 2000 that it was cutting ITdevelopment work to increase success rate offuture programmes.

Since 1994 the cost of the Inland Revenuesstrategic partnership contract soared from 1,033mto 2,426m, a 135% increase in just six years. Theincreased costs were due to new work and projects(533m), capital expenditure (409m) and postcontract verification adjustment (203m) whichrepresented additional workload in Inland Revenuearising between the invitation to tender and thetransfer of staff and commencement of contract.

120m contract for digital scanning, waiting timestripled. 12m extra costs incurred by agency Siemens had to pay 2.45m. Processing timesreached 50 days in July 1999. Operating in only 2out of 6 offices by 1999 start date. Cost of passportincreased from 21 to 28.

100m computing contract. Large backlog: 76,000asylum cases and 100,000 nationality cases.Contractor penalised 4.5m. In 2001 the HomeOffices decided to abandon final phase CaseworkApplication IT document imaging system and willrecruit 600 new staff to deal with backlog.

Abandoned in March 1996. 3.7m written off.

Office projected cost 71% above forecast.

Long delays and project overtaken by newtechnology

623m including 300m overspend, 6 years late.

Delivered 4 years late, cost 20m including 3moverspend

Claimed 17m savings but errors in cost estimates now 5m. Supposed to be revenue neutral butbudget increased by 4m per annum.

Sources: Select Committee on Public Accounts, Improving Delivery of Government IT Projects, First Report, 2000.Computer Weekly(various)

15. Public sector lose control over assets and services

The treatment of PFI/PPP assets has been clarified and should revert to public ownership at the endof the contract where it is in the public interest and when there is no alternative use for the asset (HMTreasury, 1999). However, this is likely to be only an academic matter because in 25-35 years timepublic sector capital spending may have almost vanished and public bodies may not have the capacityor political commitment to assume operational and managerial responsibility for facilities. In these

23


24/38

circumstances, another PFI/PPP seems almost inevitable and facilities will be sold at residual value tothe private sector.

16. Private sector dictating social and public needs

The replacement of detailed outline/output specifications will inevitably mean that private interests andprofit-making squeeze out public need in the design and planning of public facilities. Public andcommunity facilities will become business centres as the private sector seeks to maximise income

generation and facilities compete for custom. It is galling for those who have long argued forcommunity and multi-use of public facilities that it is suddenly public policy but on business terms,controlled and operated by the private sector.

For example, Glasgow council decided to refurbish 26 secondary schools and build two new schoolsunder a 1.2billion PFI project . However, the 3Ed consortium led by construction companies the MillerGroup and Amey PLC, and funded by Halifax PLC, persuaded the council to change the scheme to 12new schools and refurbishment of the remainder.

17. Two tier workforce transforming the labour process

The government and PFI/PPP consortia claim that the higher cost of privately financed projects will bemore than offset by the private sectors better utilisation of assets and increased operational savings.Facilities management contracts are intended to integrate services which have often been separatelytendered. Increased productivity and financial savings from support services are a core requirementfor the viability of most PFI/PPPs.

Another example of the pressure on wages was highlighted by the House of Commons PublicAccounts Committee inquiry into the use of PFI/PPP in the prison service following the National AuditOffice report into the Bridgend and Fazakerley PFI/PPP prisons. Richard Tilt, Director General of thePrison Service reported that running costs in the private sector were 8%-15% lower although thepublic sector was slowly closing the that gap. He went on to point out that a security officer in aSecuricor prison costs 14,000 a year for a 44 hour week, whilst an HMP Prison Officer costs 20,000

a year for a 38 hour week (PAC, Evidence Session, 22 January 1998). On this basis, a private prisonwith 500 staff would be 75m cheaper over a 25 year period. The Prison Service submission showedthe difference in staffing costs was greater than the total saving, thus proving that construction costswere actually higher than the public sector. Wage cuts do not, of course, represent efficiency gains buttransfers between managers, shareholders and taxpayers depending on the form of privatisation andthe type of service.

Most major cities and towns have a number of private finance/partnership projects in different parts ofthe public sector (for example, schools, hospitals, roads, regeneration, police and central governmentagencies) at different stages of development. The Private Finance Initiative is estimated to result in150,000 transfers and 30,000 job losses between 1998-2007 (Association of Direct LabourOrganisations, 1999). The cumulative effect of these projects will be more substantial than the

comparative loss of CCT or market testing contracts by the same public bodies.

These projects will have a wider impact on employment in each city. Local economy research studieshave shown that a multiplier of between 1.15 and 1.24 is applicable to contracting situations and takesinto account both jobs loss and the impact of reductions in terms and conditions (Centre for PublicServices, 1995). For every 4-5 jobs lost in local government, a further job is lost in the local economy.

The commodification of labour is a technical term but increasingly effects public sector jobs. Thegovernment is keen to strengthen certain employment regulations so long as they increase theflexibility of labour and make the process of transfer from one employer to another easier, thuspotentially reducing opposition to partnerships and privatisation. Public and private sector workers

24


25/38

(jobs) are packaged to make transfer easier. The government has emphasised the importance ofhaving a skilled and committed workforce but this has unfortunately been undermined by otherpolicies, which promote the transfer of staff between employers.

18. Impact on in-house services

Although the government has stated that in-house services may be involved in PFI/PPPs on groundsof efficiency, the greater the degree of in-house involvement, the less risk is transferred to the private

sector. This means other risks will have to be transferred. Since PFI/PPPs are not limited to newbuilding, contractors can take over services in other buildings on the same or other sites and thesubsequent loss of work is likely to lead to the closure or sale of in-house services or Direct ServiceOrganisations (DSOs). PFI/PPP consortia will be well placed to asset strip public sector in-housesupport service organisations across a city in the process of building their own facilities managementoperation. The PFI/PPP also means that new/improved facilities are privately operated leaving theolder ones under public control. Thus a process of marginalisation is set in motion with ever increasingdisparity between the two sectors.

As DSOs and technical service departments come under increasing pressure from PFI/PPP projectsand the transfer of other services, it is only a matter of time before they are acquired by PFI/PPPconsortia. The loss of further contracts would threaten the DSOs viability and help the contractor

consolidate its market position. Some projects will primarily affect white-collar staff, some projects willaffect mainly building repair and maintenance work, and others will affect the full range of supportservices. The combined impact of these projects on jobs, pay and conditions could be substantive.

19. Best Value

In theory, PFI/PPP projects should be subjected to Best Value appraisal and consultation. In practice,Best Value service reviews are running in parallel with the procurement process. In other words,reviews are being used as part of the procurement process to prepare output specifications.Consultation with users is limited to agreeing the service standards to be incorporated into theInvitation To Negotiate, questioning the basis of the PFI/PPP project is not part of the agenda. Thecombination of a rigged Public Sector Comparator and a severely limited and distorted Best Value

service review (in which the option appraisal has already been predetermined) are used to claimvalue for money.

A good practice approach to Best Value and PFI/PPP should include the following:

* If PFI/PPP proposals are included in service review option appraisals they should be fully assessedalongside public sector and other options.

* The service review must be able to justify a decision to use a PFI/PPP approach and must besubjected to District Audit and Best Value Inspectorate assessment.

* The entire PFI/PPP planning, procurement and operation phases must be subjected to Best Value

consultation with users and community organisations, employees and trade unions and the widercommunity. This should be accompanied by full information disclosure.

* Best Value service reviews should not be run in parallel with PFI/PPP procurement.

* PFI/PPP contracts should include detailed proposals for the achievement of continuous improvementover the contract period including regular service reviews and monitoring of performance.

20. Refinancing PFI/PPP projects

25


26/38

PFI consortia are refinancing deals to substantially increase profits. For example, Group 4 andconstruction group Carillion almost doubled their returns from the Fazakerley (now Altcourse) prisoncontract. Profits increased by 14.1 million (75 per cent since 1995) of which 10.7 million came fromrefinancing (extending the bank loan period at reduced interest rate and early repayment of otherdebt), and 3.4 million from completing the prison ahead of schedule and lower construction costs.The Prison Service received 1 million for additional termination liabilities.

In early 2000, Morrison Construction packaged five PFI projects in a joint venture with Edison Capital,

a financial services subsidiary of the US electricity company Edison International. It is the first exampleof bundling PFI projects and a step towards the creation of a secondary market.

Refinancing and a secondary market of PFI/PPP projects are likely to have an increasing impact onthe scope and content of PFI/PPPs generally. The PFI/PPP lobby consistently under-estimates, ordeliberately ignores, the power that international financial capital and market forces will ultimately havein determining the provision of public services. Yet marketisation means precisely that, with marketforces having a powerful influence in the division of labour, risk allocation and the provision of coreservices.

Partnerships will accelerate marketisation and privatisation, creating an owner-operator industry whichfinances, builds, manages and operates the urban, transport and welfare state infrastructure. The

construction company-led PFI/PPP consortia of the 2000s could be replaced by consortia dominatedby financial institutions and private education, health and social service firms which could merge withfacilities management firms to provide a holistic service. The more profitable PFI/PPPs will attracttakeovers from other partnership consortia - the previous Conservative government were keen toencourage a secondary market in consortia. Those that struggle financially will also be subject to saleas parent companies seek to minimise losses. Public bodies will eventually have several PFI/PPPsoperated by different consortia and contract rationalisation will inevitably take place. Ultimately, theyenable the private sector to achieve economies of scale by merging projects across sectors. Forexample, a city which has three hospital projects, a portfolio of PFI/PPP school projects, several localhousing companies, leisure, road and government agency projects will lead to rationalisation and joblosses.

Secondary trading in projects will reinforce the power of capital over the rentier state and will haveprofound implications for services and democratic accountability.

Schools and hospitals will be traded like other commodities. Further and higher education mergerscould lead to the vertical integration of secondary schools and the creation of one-stop-shopeducation. This would not only provide a feeder system, but also a satellite system of local orcommunity educational centres which could provide facilities for lifelong learning. Colleges anduniversities will be organisational hybrids, part public, part commercial companies which could readilyparticipate in consortia.

21. New form of contractor organisation

PFI/PPP has accelerated construction industry expansion into facilities management, extending thescope of the industry from design, construction, building maintenance to a wide range of supportservices.

Competitive tendering and market testing resulted in two forms of contract organisation, the privatefirm and the in-house contracting organisation with its own trading account. PFI/PPPs require theformation of a special purpose vehicle or operating company, a separate company in which theconstruction contractor, financial institutions and facilities management contractor have an equitystake. This company manages and operates the facility including selling spare capacity and vacant

26


27/38

space to third parties. The combining of finance, construction and support service companies into anew owner-operator industry has been warmly welcomed by the Confederation of British Industry.

22. Loss of public interest

There has been an erosion, or redefinition, of the public interest. In a climate of partnership with ageneral political consensus about the role of private capital in the economy, policies and projects areapproved with fewer fundamental questions being asked. Projects are assumed to be in the public

interest, or if private gain is transparent, it is approved because the public sector is getting somethingit needs. Planning gain has been reduced merely to access to capital with no additional public benefitother than that which would otherwise have been provided by the public sector.

23. Long procurement and negotiation process

PFI/PPP imposes a new and more complex procurement process in the public sector. PFI/PPPprocurement is part tendering (to select a preferred bidder) and part contract negotiation, in whichpublic bodies and PFI/PPP consortia and their advisers haggle behind closed doors. It requires publicbodies to develop comprehensive project appraisal and evaluation methodologies and the ability tomonitor large performance contracts to ensure contract payments are performance related, and thatrisk is fairly attributed between client and contractor. However, neither the public sector comparator

(merely an investment appraisal), the Treasurys Project Review Group criteria nor the National AuditOffice best practice guidance refer to employment, equalities or environmental matters.

PFI/PPPs extend marketisation of services far deeper and wider than competitive tendering evercould. It virtually eliminates in-house competition (on grounds that there is no transfer of risk if servicesremain in-house) and smaller companies (because of large long term contracts and equity capital inthe consortia). Transaction costs are high (up to four times those of competitive tendering), but fromthe multinationals perspective, they form a useful barrier to market entry. They are ultimately fundedby the public sector because they are absorbed into tendering prices and the cost of doing business.

24. Shifting the balance between capital and the state

PFI/PPPs represent capital and the state forging a new relationship based on negotiated deals, longterm service contracts, shared risk and guaranteed payments irrespective of the state of publicfinances. CCT and market testing were almost entirely labour only contracts but PFI/PPPs require theprivate sector to provide a capital asset, maintenance and a wide range of support services. Capital isfurther embedded in the planning and delivery of public services and extends the enabling model ofgovernment.

The commodification of service provision results in social needs becoming subordinate to financialflows, stemming from usage or activity levels, user charges and income generation. Thedistinctiveness of the public sector is eroded to ease transferability between public and private sectorsand the former is reshaped into a residual role. It is changing the states role in the provision ofservices, redefining public service and public employee and reducing its role from provision to

underwriting, renting, procuring and regulating at an alarming rate.

The government claims that PFI/PPP are services contracts, normally for local decision-making, butthe Treasury ultimately controls approvals through the Projects Review Group. This is anotherexample of the centralisation of decision making, which will be more extensive over the next decade ifPFI/PPPs continue at their current rate.

25. A new age of corruptionA new age of corruption and sleaze seems inevitable with a plethora of partnerships, joint venturesand non-accountable quasi-public organisations responsible for large sums of public and privatemoney, despite the efforts of government to develop new codes of conduct. The key stages of the

27


28/38

PFI/PPP process are negotiated between client and preferred consortia and advisers, which takesplace behind closed doors under a blanket of commercial confidentiality.

28


29/38

Section 7 - Alternatives to PFI/PPP

There are alternatives to PFI/PPPs. The government could abandon the policy immediately, althoughthe signed projects would have to continue, and could substantially increase public sector capitalspending.

If PFI spending was replaced by conventional forms of public funding, the selling of an extra 3-4billion of gilts annually in current circumstances would seem to pose no problems (Robinson et al,2000). Abolition of PFI/PPP would not affect the Treasurys current fiscal rules - the golden rule that onaverage over the economic cycle the government will borrow only to invest and not to fund revenueexpenditure and the sustainable investment rule that public sector net debt as a proportion of GDP willbe held at a stable and prudent level. Nor would abolition affect the Maastricht convergence criteria,established for countries wishing to join the European Monetary Union, which limit governmentborrowing (to 3 per cent of GDP) and government debt (to 60 per cent of GDP).

Firstly, the government could adopt the General Government Financial Deficit for public sector currentand capital expenditure accounting, replacing the Public Sector Net Borrowing (PSNB which replacedthe PSBR). Public bodies could then borrow for capital investment from the European InvestmentBank (EIB) and the European Investment Fund (EIF) at low rates of interest. Following the AmsterdamTreaty in 1997, both the EIB and EIF directly fund schemes under the Special Action Programme forinvestment in health, education, housing, regeneration and environmental projects. Since their fundsare not guaranteed by governments, they do not count against public borrowing except in Britain andthe Netherlands. The PSNB is in surplus and rather than paying off national debt, the governmentshould be investing in the infrastructure.

So there is a clear financial alternative. Given the mounting evidence of the negative effects ofPFI/PPP on public service planning and provision, and the flimsy evidence for value for money, thisleaves the case for PFI/PPP firmly on the political and ideological terrain. We are back to the ThirdWay.

Public finances are healthy, therefore the government could increase public investment still further andstill be within the Maastricht criteria Public sector net cash requirement (PSNCR) (formerly PSBR).

29


30/38

Some PFI schemes have been abandoned

To date some 16 PFI projects (as of November 2000) have been abandoned, mainly because they failedto provide value for money or on grounds of affordability. The schemes include four NHS hospital projectsat Sheppey, Maidstone, Portsmouth and Southampton being negotiated with the Rotch Property Group.Other schemes were:

TransportA21/A27 Weald and Downland Trunk RoadsStreet Lighting, South Lanarkshire Council (affordability)

EducationCarlisle College (VfM grounds)Hinchley Wood School (affordability)Stockton and Billingham College (VfM grounds)Portsmouth University (VfM grounds)

HealthGreater Glasgow Community and Mental Health Services NHS TrustDownpatrick Hospital (NI)Fosse NHS Trust, Loughborough General Hospital (publicly funded)Orkney Health BoardMayday NHS Trust Energy project

OtherCheshire CC Information services

Publicly funded NHS projectsCauseway Hospital, Northern IrelandGlasgow RoyalGuys and St ThomassRoyal BerkshireRochdaleCentral Sheffield womens hospital (previously a PFI project)Royal Hull

Gloucestershire RoyalWestern Hospital, EdinburghWythenshawe Hospital, Manchester (part public/part PFI)

30


31/38

Section 8 - Exporting PFI/PPP

Privately financed infrastructure and sustainable development: mortgaging the future

Following a short period of nationalisation and expropriation in the 1965-75 decade, infrastructureinvestment in developing countries was regarded with uncertainty. The

What Future Pfi Ppp

Documents

Transcript of What Future Pfi Ppp